A.B. Hirschfeld Press, Inc. v. City & County of Denver

Justice ERICKSON

dissenting:

The issue in this case is whether section 53-91 to -97 of the Revised Municipal Code of the City and County of Denver authorizes the Denver Department of Revenue to impose a use tax on a commercial lithographer’s purchase of pre-press materials necessary for the production of custom printed products. The majority concludes that pre-press materials are subject to the municipal use tax. I disagree. Because pre-press materials are purchased for resale, they are not within the category of personal property upon which a use tax may be levied. To impose a use tax upon pre-press materials in addition to the sales tax imposed upon the resale of those materials results in double taxation and is incompatible with Colorado law.

I

Hirschfeld is a commercial lithographer whose business consists primarily of printing brochures, letterheads, and greeting cards utilizing the photo-offset process. Pre-press materials include film, positives, negatives, unexposed plates, transparencies, photos, and color separations used to create printing plates and are equivalent to engraved plates that printers use and deliver to their customers with their engraved products. Hirschfeld purchases pre-press materials from local wholesale dealers.

Pre-press materials are purchased as general manufacturing material by the lithographer and transformed into a customized product for a particular customer. The process is described in detail in the briefs. The image to be printed is photographed and the exposed film is developed. The negatives or color separations are incorporated into flats through the utilization of stripping materials that are typically composed of mylar and other plastic sheets. The flats orient the various negatives and transparencies into the images for print. Proofs are then created by exposing the flats to light sensitive proofing materials. The flats are then placed over unexposed plates, which are a thin sheet of aluminum treated with a polymer emulsion. The plates are then exposed to light and developed in chemicals that remove the polymer coating. The removal of the polymer coating creates areas on the plates that are receptive to ink. The plates are then attached to a drum on an off-set printing press. The image areas on the plates retain ink from a printing solution, which is subsequently transferred to paper as the drum rotates and the pre-press plates print the final product.

Hirschfeld collects and remits sales taxes for both the pre-press materials and the final printed product. Hirschfeld’s customers have title to, and often take delivery of, the pre-press materials.1 Hirschfeld’s customers often use pre-press materials, such as the plates, for successive printing runs. The existing flats may be modified to incorporate changes requested by the customer for later printing orders. Some of Hirsch-feld’s customers take delivery of their pre-press materials and ship them to offshore production facilities where off-setting work can be done at lower labor costs.

II

Section 53-96 of the Revised Municipal Code of the City and County of Denver provides that:

There is levied and there shall be collected and paid a tax in the amount stated in this article, by every person exercising the taxable privilege of storing, using, distributing, or consuming in the city a *927service subject to the provisions of this article or any article of tangible personal property, purchased at retail, for said exercise of said privilege....

(Emphasis added.) The legislative intent of the use tax is that “every person who stores, uses, distributes or consumes in the city any article of tangible personal property ... purchased at retail, is exercising a taxable privilege.” Denver Code, § 53-92 (emphasis added).

The authority to impose a use tax is dependent on the threshold question whether the item of personal property is purchased at retail. If the item of personal property is not purchased at retail, then the department of revenue has no authority to impose a use tax regardless of the extent of storage, use, or consumption of that item. Section 53-95(12) defines a retail sale as “any sale, as defined in this section, except a wholesale sale.” A wholesale sale is defined as, “A sale by a wholesaler to licensed retail merchants, jobbers, dealers or other wholesalers for resale_” Denver Code § 53-95(21) (emphasis added).

If an item of personal property is purchased from a wholesaler for the purpose of resale, then it is not a retail purchase, and the Denver Department of Revenue has no authority to levy a use tax upon that item. Because the statutory definition of wholesale is clear and unambiguous, there is no need or justification for the judicial creation of a standard to determine the primary purpose of a purchase based upon the degree of use by the original purchaser. The only question which need be addressed by this court is whether the materials purchased by Hirschfeld were resold.

The dual nature of pre-press materials creates some confusion as to whether they are purchased at wholesale for resale or whether they are purchased at retail for the purpose of manufacturing a final product. Pre-press materials are essential to the production of the final lithograph ordered by the customer. However, pre-press materials are also a product that has substantial value.

The majority focuses on the role of pre-press materials in manufacturing the printed product, and has concluded that because pre-press materials are used for the production of a lithograph, they are subject to the use tax. In coming to that conclusion, the majority fails to address the threshold question of whether the pre-press materials are also purchased for resale. The majority has misinterpreted the municipal ordinance to read that the definition of wholesale is solely for resale and not for any intermediate use. Such an interpretation violates the general rule in Colorado that “tax statutes will not be extended beyond the clear import of the language used, nor will the operation be extended by analogy.... All doubt will be construed against the government in favor of the taxpayer.” Transponder Corp. v. Property Tax Admin., 681 P.2d 499, 504 (Colo.1984); see also Catholic Archdiocese v. City of Denver, 741 P.2d 333 (Colo.1987).

Colorado recognizes the potential for confusion resulting from the dual nature of pre-press materials and has therefore promulgated Colorado Sales and Use Tax Regulation No. 37, which states that, “Pre-press preparation materials ... shall qualify as exempt purchases of tangible personal property to the extent such items are utilized for the production of a specific product for a specific customer and title passes to the customer as part of the total sale_” Printers and Printing, State Tax Reporter, Colorado (CCH) 1160-152 (1986). Pre-press materials are also exempted from sales or use tax in Georgia,2 Idaho,3 Iowa,4 Louisiana,5 Maryland,6 Minnesota,7 Mississippi,8 New Jersey,9 New *928York,10 Tennessee,11 and Virginia.12

Ill

The purpose of the use tax is to supplement the sales tax, and therefore should not apply to property subject to sales tax. State Dep’t of Rev. v. Adolph Coors Co., 724 P.2d 1341, 1344 (Colo.1986); see also, § 39-26-203(l)(a), 16B C.R.S. (1982). The use tax “was designed to apply to the use and consumption of commodities elsewhere purchased at retail, which, if purchased in Colorado, would have been subject to the sales tax.” Bedford v. Colorado Fuel and Iron Corp., 102 Colo. 538, 540, 81 P.2d 752, 753 (1938). As this court observed in State Department of Revenue v. Adolph Coors Co., “Because the sales and use taxing schemes are designed to complement each other, provisions of one should be interpreted in harmony with provisions of the other.” 724 P.2d at 1344. Hirschfeld’s customers pay sales tax on both the final printed product and on the pre-press materials, and the imposition of an additional use tax would be incongruous with the design and intent of Colorado’s retail tax structure.

The majority relies on Carpenter v. Carman Distributing Co., 111 Colo. 566, 144 P.2d 770 (1943), and Craftsman Painters & Decorators v. Carpenter, 111 Colo. 1, 137 P.2d 414 (1943), in support of its conclusion that the statutory definition of a retail sale is quite broad and encompasses any significant use by the manufacturer. Carman involved fabrics, threads, and buttons used as a matter of course by laundries in repairing garments. We relied on the fact that the price of the laundry services was the same whether or not repairs were made. Carman, 111 Colo. at 569-70, 144 P.2d at 771-73. The laundry was properly responsible for a use tax, since it was the ultimate consumer of the goods, charging no sales tax on the final transaction directly related to the fabrics, thread, and buttons. Carman, 111 Colo. at 577, 144 P.2d at 774.

In Craftsman Painters, which dealt with paint and electrical wiring used by a contractor, we did not indicate whether the price charged to the ultimate consumer was affected by the cost of the paint and wiring or whether the ultimate transaction was subject to a tax. Since the materials became part of the realty, it is highly unlikely that they would have been subject to a sales tax, as a sales tax may only be levied on personal property. The contractor was thus the ultimate consumer of the materials and was properly required to pay a use tax. Here, Hirschfeld is not the ultimate consumer, and properly charges a sales tax on both the printed matter and the pre-press materials.

The imposition of a use tax for pre-press materials in addition to the sales tax already collected is improper as double taxation. In IBM v. Charnes, 198 Colo. 374, 376, 601 P.2d 622, 625 (1979), we imposed a use tax on items purchased at wholesale but permanently diverted to IBM’s own use. In coming to this conclusion, we enunciated the following rule: “Exemption of intermediate sales from use tax is designed to avoid multiple taxation, the goal being to impose the sales or use tax on the final, consumptive transaction.” Id. at 378, 601 P.2d at 625.

The majority states that the taxes imposed on the pre-press materials reflect different transactions and different taxable events, and that a use tax is proper. In coming to this conclusion, the majority reasons that Hirschfeld is using the pre-press materials for a separate and distinct purpose other than that of its customer. Pre-press materials serve only one purpose, to create plates necessary for the reproduction of customized printed material for an individual customer. The pre-press materials to the lithographer are as essential to the sale of the final printed product as a container is to a brewer of beer. See State *929Dep’t of Revenue v. Adolph Coors Co., 724 P.2d at 1345. Hirschfeld may use the pre-press materials, but it uses them to create the product ordered by the customer, and not for any other independent purpose or benefit.

I respectfully dissent.

. Some of the pre-press materials such as film are consumed during the production process and therefore cannot be delivered to the customer. Such materials fall within the manufacturing exception to the use tax. Denver Code § 93-95(21)(b).

. Hawes v. Higgins-McArthur Co., 117 Ga.App. 738, 161 S.E.2d 915 (1968).

. All St. Sales Tax Rep. (CCH) 33-540 (1989).

. All St. Sales Tax Rep. (CCH) ¶ 33-046u (1989).

. All St. Sales Tax Rep. (CCH) ¶ 7-350.23 (1989).

. All St. Sales Tax Rep. (CCH) ¶ 7-350.25 (1989).

. All St. Sales Tax Rep. (CCH) ¶ 45-363 (1984).

. All St. Sales Tax Rep. (CCH) ¶ 46-551 (1988).

. All St. Sales Tax Rep. (CCH) ¶ 7-350.35 (1989).

. All St. Sales Tax Rep. (CCH) ¶ 7-350.37 (1989).

. All St. Sales Tax Rep. (CCH) ¶ 7-350.48 (1989).

.All St. Sales Tax Rep. (CCH) ¶ 73-586 (1987).